Judge rules Houston’s sale of $1B in pension bonds can proceed

The City of Houston can move forward with its plan to sell $1 billion in bonds Friday as part of the historic pension reform passed by the Texas Legislature earlier this year, a judge ruled.

State District Court Judge Mark Morefield on Thursday denied a request for a temporary restraining order filed by a private citizen against the city, under which Houston would have had to delay the issuance of the bonds.

The request for the restraining order was part of a suit filed last Friday by local businessman and former Houston housing department director James Noteware, who alleges that Mayor Sylvester Turner used vague language to mislead voters on the ballot initiative, and that the bond issuance should be paused until the legality of the ballot measure is determined.

Noteware and his attorney, Jerad Najvar, argued that, should the bonds be sold and the ballot measure later be ruled illegal, taxpayers will be on the hook for decades of payments to bondholders. City officials, including former Houston Mayor Annise Parker, faced a similar dilemma in 2015, when a state district judge voided a 2010 referendum to the city charter that allowed for billions of dollars in improvements to the city’s streets and drainage system.

In sworn testimony submitted to the court Thursday, Melissa Dubowski, assistant director of the Houston Finance Department’s Treasury and Capital Management Division, said the city would lose roughly $1.8 billion in benefit reductions, should it not be able to issue its bonds.

Proceeds of the $1 billion in bonds, the sale of which was approved by voters last month, will be given to Houston police and the municipal employee pension funds in exchange for their acceptance of benefit cuts negotiated by Mayor Sylvester Turner.

City officials also argued that Houston’s credit would be irrevocably damaged by the last-minute delay in the bond issuance, citing other, recent bankruptcies filed by cities like Detroit, Michigan.

“It was not the dollar amount of those pension liabilities” that led to those cities’ bankruptcies, argued the city’s attorney Reagan Brown, of Norton Rose Fulbright. “It was that, at the end of the day, the capital markets lost confidence.”

“At that point,” he added, “a parade of horrible occurred to those cities.”

In his decision, Morefield said there were “substantial” concerns regarding the legality of the ballot measure, but that he ultimately agreed with the city’s argument that delaying the issuance would significantly damage Houston’s standing among creditors and bondholders.

“I think we’re just too far down the road at this point in time to stop this train,” Morefield said. “The mayor and City Council are heavily invested in this. And this thing is going to go forward.

“They may have to pay a heavy consequence for it going forward,” he added.

What’s next?

The bonds are part of Turner’s landmark pension reform plan, which recalculates the city’s payments to erase a debt of more than $8 billion debt over three decades, cuts benefits by $2.8 billion and includes a mechanism to cap Houston’s future pension costs.

Navjar told the Chronicle on Thursday that the larger lawsuit will likely be sped up once a setting date is established.

At that time, a court will weigh Noteware’s claim that the “boilerplate” ballot language was simply a way for city officials to sidestep a 13-year-old revenue cap in order to levy more taxes to pay for the pension bonds. Under that revenue cap, approved by voters in 2006, the city was allowed to raise an extra $90 million for public safety spending – a limit that was exhausted by 2014.

The city has since tweaked the cap twice, in 2015 and 2016, invoking flood disaster declarations to raise a extra, combined $22 million. Turner similarly attempted to raise property taxes this year in response to Hurricane Harvey, but was stymied by City Council.

Najvar and Noteware said last week that they worry the ballot initiative will allow Turner or other future mayors to sidestep those limits. Noteware also said he would not mind if his lawsuit scuttles the broader pension reform deal, which he said he views as inadequate.

“I see why the mayor is saying, ‘Don’t worry, we’re never going to use this,’ but nonetheless it’s there,” Najvar told the Chronicle last week. “If this election was valid, then this builds in the authority that the city did not have before to go around that revenue limitation. If the election is going to be challenged, it has to be done right now.”

The claim was quickly blasted by city officials as “baseless”

“The suit is factually and legally baseless and from a taxpayer policy viewpoint completely illogical, as disrupting the pension reform will cost taxpayers more money,” Turner spokesman Alan Bernstein said at the time. “There was never any intent to avoid the revenue cap nor are there any facts indicating that we would. It is easy to throw baseless bombs. The price of doing so for the plaintiff and his lawyer is far less than the harm he is trying to inflict on taxpayers.”